Capital Intelligence (CI), the international credit rating agency, has today affirmed Jordan’s Long-Term Foreign Currency Rating of ‘BB-’ and its Long-Term Local Currency Rating of ‘BB’. At the same time, CI has also affirmed Jordan’s Short-Term Foreign and Local Currency Ratings of ‘B’. The Outlook for Jordan’s Long-Term Foreign and Local Currency Ratings has been affirmed at ‘Stable’.
The affirmation of Jordan’s ratings balances the recent improvement in the country’s capacity to absorb economic shocks against rising geopolitical risk.
Benefiting from increased support from international donors, Jordan’s foreign exchange reserves grew by more than 80% in 2013, now fully covering external debt falling due within a year. The external current account deficit declined by almost one-third last year – albeit to a still very high 14.4% of GDP –due to the combination of lower oil prices, higher workers’ remittances and the resumption in the supply of low-cost gas from Egypt. The rate of dollarization in the financial system also declined, reflecting renewed confidence in the local currency.
Balance of payments risks are expected to remain high in the intermediate term, and the gross external financing requirement is expected by CI to exceed 34% of GDP this year. Near-term risks are, however, greatly mitigated by the recently restored official reserve buffer and ongoing financial assistance from regional and strategic allies, as well as international financial institutions.
The ratings affirmation also takes into account the authorities’ commitment to structural reforms, which are aimed at correcting the economy’s chronic imbalances. Despite a challenging regional environment, the economy grew by almost 3% for the fourth year in a row in 2013 and is expected to expand by a further 3.5% this year. Medium-term growth prospects would be favourable if it were not for the currently unsettled geopolitical situation, with the influx of refugees from neighbouring Syria aggravating socioeconomic imbalances and putting pressure on scarce resources. The growing insurgency in Iraq is also adding to security concerns.
The public finances remain the major constraint on Jordan’s ratings in view of the weak budget structure, growing debt burden and high financing requirements. The overall central government budget deficit declined to 5.3% of GDP in 2013 from 8.3% in 2012. However, the deficit would have been 8.1% of GDP but for foreign grants – which highlights the importance of external support for fiscal sustainability.
Gross central government debt continues to rise and is likely to exceed 90% of GDP by 2016, reflecting chronic fiscal deficits and the continued issuance of government-guaranteed debt for loss-making public entities, in particular the National Electricity Production Company (NEPCO). Interest expenditure exceeded 12% of budget revenue in 2013, and is expected to continue increasing in view of the growth of the debt stock and high domestic borrowing costs.
Refinancing risks remain high, with government debt falling due in the region of 25% of GDP in 2014. However, near-term refinancing risks appear manageable given that the majority of scheduled debt repayments are in local currency and local banks appear able and willing to buy local currency debt. In addition, the government is expected to meet a large part of its short-term financing needs through the issuance of a second eurobond guaranteed by the US government.
The government has expressed its commitment to fiscal consolidation over the coming years and aims to reduce the budget deficit to about 3% of GDP by 2015. However, this could prove extremely challenging in the current economic and political environment.
Local Currency Ratings
The higher local currency rating reflects the government’s stronger repayment capacity in Jordanian dinars due to moderate monetary policy flexibility and control of the tax system. The local currency ratings also reflect banking sector liquidity and the progress made with regards to developing the government debt market. Local banks are expected to remain willing and able purchasers of government debt over the medium-term, in part due to the lack of alternative domestic investment opportunities and the availability of substantial excess liquidity (estimated at USD4.4 billion in conventional banks).
The ‘Stable’ Outlook indicates that Jordan’s sovereign ratings are likely to remain unchanged over the next 12 months, and balances improving international liquidity and the likely availability of external financial assistance in times of need on the one hand, against the country’s high debt metrics and significant geopolitical risk on the other.